My most recent books are the Leader's Guide to Radical Management (2010), The Leader's Guide to Storytelling (2nd ed, 2011) and The Secret Language of Leadership (2007). I consult with organizations around the world on leadership, innovation, management and business narrative. At the World Bank, I held many management positions, including director of knowledge management (1996-2000). I am currently a director of the Scrum Alliance, an Amazon Affiliate and a fellow of the Lean Software Society. You can follow me on Twitter at @stevedenning. My website is at www.stevedenning.com.

Is Continuous Innovation Too Risky?

An idea that is pervasive in corporations in both America and Europe and prevalent in business schools, management journals and textbooks is that the goal of a firm is to maximize shareholder value. It’s prevalent even though leads to unsound management practices. Jack Welch, considered by many to be a leading practitioner of the idea, recognized in 2009 that shareholder value is a result, not a strategy. Worst of all, maximizing shareholder value creates the risk of disruptive innovation.

The most frightening thing about disruptive innovation—the phenomenon documented in Clayton Christensen’s The Innovator’s Dilemma (HBSP, 1997) in which market-leading companies in industry after industry have missed game-changing transformations—is that the mistakes are not the result of “bad” management.

Instead, as Alan Murray has noted in the Wall Street Journal, the disasters have occurred because managers were following the dictates of “good” traditional management. They studied their customers. They carefully researched the market and new technologies. They meticulously cultivated innovation. They stringently evaluated new development and weighed the cost of new investment against potential gains. And in the process, they missed disruptive innovations that opened up new customers and markets for alternative blockbuster products.

The solution to disruptive innovation: continuous innovation

As James Allworth has written in the HBR blog, the solution to disruptive innovation is continuous innovation. But continuous innovation is almost impossible to achieve when the goal of the firm is maximizing shareholder value.

“Anyone familiar with Professor Christensen’s work will quickly recognize the causal mechanism at the heart of the Innovator’s Dilemma: the pursuit of profit. The best professional managers — doing all the right things and following all the best advice — lead their companies all the way to the top of their markets in that pursuit… only to fall straight off the edge of a cliff after getting there….”

Yet firms like Apple [AAPL] have been able to achieve continuous innovation and customer delight by setting aside maximizing shareholder value.

“They [Apple] can do it because Apple hasn’t optimized its organization to maximize profit. Instead, it has made the creation of value for customers its priority. When you do this, the fear of cannibalization or disruption of one’s self just melts away. In fact, when your mission is based around creating customer value, around creating great products, cannibalization and disruption aren’t “bad things” to be avoided. They’re things you actually strive for — because they let you improve the outcome for your customer.

Pursuing the goal of maximizing shareholder value produces less shareholder value than a sharp focus on delighting the customer. As a result, the transition from shareholder value to customer delight, as well as to the radical management principles needed to support the transition, is now inevitable. The economics will in due course force the transition. The question isn’t whether it will happen but rather: when?

Radical management can appear risky

Yet the transition out of the defunct focus on shareholder value isn’t easy. A colleague wrote recently:

“This is really groundbreaking work and hard to do. I’m currently working with a company that’s in the middle of an investor negotiations. Some of the company principles currently being written (including shareholder profit and customer delight) that I advocate, is very management 2.0. But the executive team say “I hear what you say – and in principle, I agree, but…”. This is perceived to be way too risky to communicate to the investor.”

The inexorable shift from shareholder value to continuous innovation and customer delight will not be an easy transition for many companies: they will perceive it as too risky. However the much bigger risk in the medium term is not making the transition: by failing to get on a path of continuous innovation, the firm subjects itself to the more serious risk of disruptive innovation, which leads inexorably to corporate death.

Don’t implement in the middle of an investor negotiation

Yet, as elsewhere, timing is everything. Launching the transition in the midst of a negotiation with investors is probably not a good idea. For a company that is still very much in a traditional management mindset and modus operandi, telling the investors that it is doing anything different would be misleading.

The company could tell the investors that they plan to explore the possibility of a transition, if such a decision has already been made. Once they are through the negotiation, they can start exploring what would be involved in moving to the new mode.

With energetic implementation, with very strong support from the top, as at Salesforce, it would take a medium-sized firm at least a year to get through the transition. With less energetic implementation, the transition might take a number of years. Whatever the pace, the company can report periodically to investors as the transition unfolds.

What’s involved in energetic implementation?

Salesforce had spectacular results in making the transition to radical management principles. It accomplished this by a fast, open comprehensive approach, as I noted in an article last year:

A document was prepared describing the new process, its benefits, and why the firm was moving away from the old process. The team held forty-five one-hour meetings with key people from all levels in the organization. Feedback from these meetings was incorporated into the document after each meeting, molding the design of the new process and creating broad organizational support for change. This open communication feedback loop allowed a large number of people to participate in the design of the new process and engage actively in the solution.

One team in the organization had already successfully run a high-visibility project using iterative methods. This experience helped when they introduced it to all the other teams.

At this point, the conventional wisdom would have been to pursue an incremental approach using pilot projects and a slow rollout. The management instead opted for a “big-bang” rollout, moving all teams to the new process at the same time. It was a difficult decision. The key factor driving it was a wish to avoid organizational dissonance and a desire for decisive action. Everyone would be doing the same thing at the same time.

The process started by sending a large group of people (initially program and functional managers) to training and buying training books for all staff. Three key members from the cross-functional team developed a consolidated presentation and training deck that included concepts from the current methodology. Two-hour training sessions were held for every team. In addition, training was given to the proxy client representatives who would be setting priorities as “product owners.” They also created an internal, wiki-based Web site as a reference for team members as they made the transition to the new methodology and for information about the change process.

The cross-functional team did its work in an iterative fashion and focused daily on whatever was needed to make the implementation successful. It created a global schedule for the entire process, provided coaching and guidance, identified and removed systemic impediments to change, monitored success, and evangelized the new way of working throughout the organization.

Key features of the change included a focus on team output rather than individual productivity and cross-functional teams that met daily. All teams used a simple iterative process with a common vocabulary, with prioritized work programs for each iteration. They planned the work with user stories, estimated tasks with planning poker, and defined organizational roles using a common terminology for all teams. The result was a new release of software every thirty days.

Adapt the principles to the particular organization

Some firms try to implement the transition to radical management principles as a rigid methodology with no allowance made for the different requirements of different contexts. It’s implemented with the exact terminologies, job descriptions and procedures that have been worked out in other organizations. This can lead to friction as the externally grown ideas don’t fit exactly the new environment. By contrast, Salesforce built on what had been learned in other organizations, but also adapted it to their own context.

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Steve, thanks for this thought-provoking read. We hear a lot about how disruptive innovation is an opportunity or the gold standard to work toward, not a risk or threat. If I’m interpreting your argument correctly, you’re looking at it from the perspective of “the rest of the world” (those who can’t or don’t achieve disruptive innovation)?

I like the notion of continuous innovation. Is it possible for a company to work toward both continuous and disruptive innovation at the same time? That seems to be what Apple does (even if it is driven by achieving customer delight). Are the two mutually exclusive?

Whether we’re talking about continuous innovation or disruptive innovation, perhaps the problem underlying all of this is when an organization doesn’t make it a priority to foster innovation of any kind in a systemized way. That goes back to the focus on profit and maximizing shareholder value that you highlighted.

Thanks for your comment. Is it possible for a company to work toward both continuous and disruptive innovation at the same time? Absolutely. A key aspect of continuous innovation is a willingness to cannibalize one’s own products or services. If you don’t do it, another firm will.

As you point out, this is what Apple does. Other companies pursuing continuous innovation pursue the same track such as Amazon and Salesforce. This isn’t possible if the firm is focused tightly on maximizing profits, because milking the cash cows will always seem in the short run to be more profitable than cannibalizing them.

Steve you know I am a big fan, and I think this is a great article, but I don’t get the frequent call-outs to apple. I know what they tell you, but their actions to me speak of one of the most maniacally greedy companies I can think of, particularly in the high tech sector. They are notorious for price gouging and doing everything they can not to protect their IP but to try to use legislation and the legal system to cease positive progress in an industry which does so much to advance societal progress. They constantly file ridiculously abusive patents and use their litigation to prevent competition. Microsoft lost antitrust battle by simply not allowing the removal of IE even though they had a platform that was far more open than anything apple has ever done, and apple prevents any company or individual from offering any applications that are even slightly competitive with apples own features. I think apple makes great, innovative products that provide a valuable service to their audience, but they are a premium brand with a premium price, and they want to force the entire world to consume only their products. Most other premium brands in any industries are fine with the fact that other lower-cost brands will eventually emulate their innovations within the realm of the law. And that is an important part of society, premium brands sell premium products with advancements that could really benefit a much larger audience, and over time those advancements trickle down to other brands. Apple has tried to patent very, very vague things over and over again and use their legal arm to halt progress in society. Mercedes has a premium brand, and they build premium products for a audience that wants to pay premium prices, they do protect their IP in a responsible way, I dont think there has been much of a problem with them trying to abuse the law to prevent other car brands from existing. Car brands protect their vary specific attributes, but I have never seen one try to prevent others from an entire class of products like apple seems to be trying with their tablets. And because they have tried to take a niche-market business model and convince people that it is a mass-market model, they are hugely overvalued. Content providers will not tolerate Apple’s price gouging when there are viable alternatives, all of the content producers have been pretty vocal about this. To me talking about radical management and increasing the positive and ethical ways that businesses needs to change is completely at odds with what apple seems to practice. Apple has captured some disruptions, but I think the consumerization trend and the democratization of knowledge specifically around IT development, the advancement of open platforms and open innovation, these will lead to sustainable business, not overtly monopolistic practices and price gouging.

Thanks for your detailed comments. I agree that it is important to avoid the Halo Effect, attributing all sorts of good qualities to firms that are successful.

Apple has many flaws. I have written about some of the most egregious ones on a number of occasions here and at length. You have documented some more in your comments.

Nevertheless in the most important area of all in today’s marketplace, Apple is one of the few large companies (the only?) that has made a transition from shareholder value to delighting customers. There is quantitative evidence for this in The Ultimate Question 2.0. I repeatedly run into people who tell me that it is so and give me vivid examples. Personally, I am not a Mac fan or an iPad user, but I can see what people are talking about. So I accord Apple recognition for its accomplishment. If however Apple does not correct the flaws, I agree with you that its success is unlikely to be sustained. It’s a question of seeing the strengths and weaknesses in a balanced way.

Steve … the concept is great. But you missed the most important subject.

You explained what, but not whom. Are you proposing a board-of-directors-level initiative, a CEO-level initiative that the board will be fine with so long as ROA doesn’t drop below some specified level, or what?

This might seem obvious. But without clarifying who is supposed to make this happen (CEO or board?), who is most likely to resist the idea and why (board or fund-manager investors?), and what to do about that resistance, this isn’t actionable.